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Improper sizing of a drain line, heating or air-conditioning unit leads to poor performance, which results in you and your customer not being happy campers. Similarly, charging less than the amount it really costs you will not only make you unhappy — it will give you unwanted stress and frustration.
For consumers, instead of excellence, your customer will receive mediocrity. The peace of mind that comes from the consumer’s belief that you would be able to stand behind your workmanship will be absent. And, in turn, trust in your workmanship, which leads to repeat business from consumers, will be faint if not non-existent. That lack of confidence is one of the high costs incurred by charging less than that which it truly costs you to operate your business.
What is the true cost of operating a PHC service contracting business in the U.S.? At the present time, dependent upon geographic location, it costs contractors minimally $100 to $250 per tech hour to have a qualified service tech and truck ready to serve consumer requests when 1,708 annual available revenue producing hours are sold per tech all the time. That’s the cost to the contractors, not the selling price to consumers.
When you sell less than all your available revenue producing hours, the range of labor/overhead cost will be higher yet. Example: The minimum $100 cost to contractor (based on 1,708 annual hours sold per tech) becomes $142.86 if only 70 percent (1,195.6 hours) of annual available tech hours are sold.
Since 2 + 2 = 4, never less and never more, how is it possible that some PHC contractors charge less than $100 per hour? The answer is simple. They don’t know the true amount it costs themselves to operate their business. And, without that important information, selling prices are guessed at rather than calculated.
Not knowing is the definition of ignorance. No one knows everything about all matters. But, for PHC contractors not knowing their true cost of operation brings to mind the adage that “ignorance is bliss.” Unfortunately, that bliss leads them to believe their problems are caused by the industry rather than their own flawed managerial procedures. You might wonder if that is so, how do they stay in business? Well, that too has a simple answer.
To force their businesses to exist they manipulate the numbers in a way that only exacerbates their problems and increases their stress and frustration.
One-person operations just work more hours to make up for selling their services below their true cost. By that I mean, a contractor who wants to earn a certain amount annually as his/her salary tries to sell twice as many hours to bring in that annual amount, which hopefully allows them to stay in business.
Example: Contractor wants a $50,000 annual salary (note: this amount is not a suggestion of the amount a contractor’s salary should be — in many parts of the U.S. it would not be sufficient — it is for example’s sake only) which costs the business $29.27 per hour ($50,000 ÷ 1,708 hours). But, if he/she sells 3,416 hours for the same salary, the salary expense per hour is cut in half.
However, no one really wants to perform PHC services 3,416 hours every year (39 percent of their annual lives) for the rest of their lives. The Fair Labor Standards Act on June 26, 1940 amended the work week to 40 hours, which is the barometer by which true cost of operation should be calculated. Therefore, that contractor doesn’t make $50,000 a year for his/her job as a technician. He/she really has two jobs that each pay $25,000 per year. Or, he/she works lots of overtime for less than time and half, which is a federal mandate, or, for any extra remuneration for additional work performed. Ergo, they cheat themselves.
The problem is further exacerbated when he/she doesn’t sell 3,416 hours per year.
There are only 8,760 hours in a year. If you subtract 3,416 revenue producing hours of work time from that contractor’s year, there are only 5,344 hours left for his/her life. Sleeping will use 2,920 (33 percent) of those hours leaving only 2,424 remaining. Hygiene will eat up minimally 365 hours (4 percent) while eating meals takes at least 548 hours (6 percent), leaving just 1,511 hours. But, performing the administrative tasks of business ownership, checking out the vital signs of a service vehicle and restocking that vehicle with truck inventory will minimally take another 976 hours (11 percent). Two weeks of vacation/personal time and six holidays takes up 270 hours (3 percent). Guess what? That contractor has only 265 hours (3 percent) for daily life enjoyment. That’s not even 1 hour a day. Even when you add the daily enjoyment hours to the 270 for vacation/personal/holiday time not worked, you only have 535 waking hours (6 percent) to enjoy life.
But, by calculating operational cost and selling prices on 1,708 revenue producing hours, he/she could have another 1,708 annual hours to enjoy life (4.68 more hours per day). When added to the 270 for vacation/personal/holiday time not worked and the 265 hours, he/she would have 2,243 waking hours (26 percent) to enjoy life.
To paraphrase another adage, before deciding how to run your business, you must ask yourself, “Do you want to work to live, or live to work?”
The $50,000 example only includes the contractor’s salary. It doesn’t include any salary related expenses e.g. matching FICA funds; unemployment/disability insurance; worker’s compensation insurance (or, some type of insurance if the single person operator becomes physically unable to work); liability insurance related to payroll; health insurance; and retirement funds. Those issues will increase the cost per tech hour by minimally 25 percent making the aforementioned hourly salary expense of $29.27 increase to minimally $36.59. And then, there is the overhead cost factor that all businesses incur including those run from the kitchen table, that must be added.
Multi-person operations make wrong numbers work using procedures that can only lead to poor employee morale and/or breaking laws of the land regarding employees when you cheat employees by not paying proper overtime; infringing on work conditions etc.
The cheating doesn’t end with employees. It also extends to the quality of service provided to consumers which leads to the delivery of mediocrity rather than excellence.
But, problems don’t only exist for those who charge less than the minimum cost of $100 per tech hour. If the price at which you sell your hours falls in the labor/overhead cost range of $100 to $250, but, you didn’t 1) crunch the numbers properly; 2) apply a proper profit margin to your costs; and/or, 3) calculate the correct number of hours to perform a service, you too could be shortchanging your business and affecting your business results.
Let’s look at the dollar effect the high cost of shortchanging your business creates.
The high cost of charging the wrong amount
Figure 1 shows the effect of selling your services below your true cost of operation in $5 increments up to $30 per tech hour. I chose this range because I have noticed that many contractors sell their services for minimally $30 per tech hour less than their true cost to produce that hour. At that level, you would be shortchanging yourself by $51,240 per tech per year (1,708 hours x $30). A business with two techs misses out on $102,480 annually. The incremental amounts below the $30 level show that even less shortchanging costs you the contractor significantly.
If you shortchange your business more than $30 per tech hour, the high cost of charging the wrong amount is greater yet.
As an example of another way of looking at this problem: Let’s say you are a one-person operation and you sell all your available tech time (1,708 hours annually) at $70 per hour. But, your true cost of operation is the minimum $100 per tech hour. How many more hours must you sell at $70 to make up for shortchanging your business at the $70 rate?
The answer is 732 more hours, that means you must sell 2,440 annual hours, and, that number represents an increase of 42.86 percent above the 1,708 hours (732÷1,708), at $70 per hour without an increase in any business expenses including your salary. How did I come to these numbers?
If your true cost is $100 at a maximum 1,708 hours of annually available revenue producing hours, your total annual operational cost per tech/truck would be $170,800. To bring in that $170,800 at $70 per hour you would have to sell 2,440 hours ($170,800 ÷ 2,440 hours = $70 per tech hour).
The fact that no contractor sells all their available tech hours all the time means the risk factor associated with business ownership must also be considered when establishing selling prices.
Without an increase in business expenses that includes your own salary, you would be working those extra 732 hours for no pay. If you do, you should really contemplate changing your ways, or, going out of business and working for a contractor who knows how to properly calculate expenses, deliver excellence and charge properly profitable selling prices. You’ll probably be better off.
If you have an opinion on this article; want an opportunity to attain your contractor profit advantage; would like information on the ways I can help you; or, would like to order a copy of my Readily Available Pricing Information Digest pricing guide which is customized to your true cost of labor and overhead, and, puts prices at your fingertips for rapid and profitable price quoting, give me a call.
Richard P. DiToma has been involved in the PHC industry since 1970. He is a contracting business coach/consultant and an active PHC contractor. For information about the Contractor Profit Advantage or to contact DiToma: call 845-639-5050; e-mail firstname.lastname@example.org; mail to R & G Profit-Ability, Inc. P.O. Box 282, West Nyack. NY 10994.